He pointed specifically to business investment which, although expected to record strong growth of 6.6% in 2014, 5.7% in 2015, and 5.7% in 2016 - by 2016 will still be slightly lower than in 2008.

Low UK business investment dragging productivity

“Crucially,” he said, “Britain is simply not investing enough. While business investment is expected to grow, it will remain way below pre-crisis levels for some time.  There is also more to do in securing access to finance for growing firms – as this too will be crucial to securing our economic future. So is getting public and private sector funding together to address the crippling gaps in our transport, digital and energy infrastructure.”

The Budget report followed news in February that Britain's productivity gap with its main developed country rivals is at its widest in 20 years.

International comparisons released by the Office for National Statistics (ONS) revealed that output per hour worked in the UK is 21% lower than the average for the other six members of the G7 – the US, Germany, France, Italy, Japan and Canada.

The ONS said the UK productivity deficit was most pronounced in comparison with the US, Germany and France, where the gap was now more than 30%. By contrast, British workers produced 11% more per hour than their Japanese counterparts and lagged behind those in Canada and Italy by five and 11 points respectively.

One principal opportunity to increase productivity would be a strong resurgence of business investment in order to both start closing the productivity gap and to trigger a rise in real wages for people in work.

Yet the post-recessionary environment has witnessed a reluctance for established lenders (principally banks and bank parents of leasing companies) to lend to businesses to replace legacy and outdated equipment. Figures from the Bank of England show a further decrease in bank lending to small businesses in the first three months of 2014

An innovative new route

Funding Circle was conceived when small businesses were most obviously struggling to obtain finance from traditional channels. The five main lenders – banks – were providing some 90% of all business lending.

As a consequence, three entrepreneurs decided to provide finance to small and medium-sized businesses via an innovative new route – peer-to-peer lending (P2P). In August 2010 Samir Desai (CEO and co-founder), James Meekings (CMO and co-founder), and Andrew Mullinger (head of global risk, co-founder) formed Funding Circle with the express aim of transforming the established business finance market in the UK.

Backing was achieved with the support of Index Ventures, Union Square Ventures and Accel Partners as well as by support from private investors Charles Dunstone of The Carphone Warehouse, Edward Wray of Betfair and Jon Moulton of Better Capital.

Prior to forming Funding Circle, Desai was an executive at private investor Olivant, Meekings a senior consultant with OC&C Strategy Consultants, and Mullinger had worked with Nomura, Citigroup and Ernst & Young.

Although P2P consumer lenders had previously been established in the UK, Funding Circle was the very first operation designed to use the P2P process for SMEs.

An established platform

The operation rests on an established P2P platform, however, with investors browsing businesses that Funding Circle has credit assessed and approved for lending. Businesses then submit applications which are reviewed by credit assessors, then, once approved; firms post their loan request on the Funding Circle marketplace. Then, investors choose which type of business to lend to, and through an auction process bid the amount they wish to lend, and the interest rate they want to earn.

David de Koning, head of communications at Funding Circle (pictured) told Asset Finance International: “Loan auctions typically take seven days. After the business accepts the loan they make one repayment each month which is collected by Funding Circle and distributed to all the investors. Loan requests are typically made up of a range of investors each bidding small amounts on hundreds of different businesses to spread the risk.”

“In our first 10 weeks of operation,” de Koning explained, “investors used Funding Circle to lend more than £1 million to small businesses. By September 2013 we had trebled in size and facilitated a total of £150m since launch. Currently we are lending £20m each month and total lending has reached £265m covering some 4,000 businesses.”

In March 2013 Funding Circle was awarded £20m through the UK government’s Business Finance Partnership – this was followed by the promise of a further £40m in February 2014.

de Koning said that typically Funding Circle business customers have been established for 10 years and have an average turnover of £600,000. They employ on average 11 people, and see an average increase in employment of 27% after receiving finance.

Underwriting is principally from sight of audited accounts and a credit decision is given within two days. “Of applicant businesses,” he added, “some 30% would probably not have been granted finance by their banks, and the other 70% would have been accepted – but were not prepared to wait a lengthy time for a decision. It’s invariably not the cost of finance that is the problem but rather the time it takes for the banks to actually make a decision.”

Average loan value

Funding Circle finances amounts range from £5,000 to £1 million with an average loan amount of £60,000. Working and growth capital are the current most popular purposes for loans with the company seeking to expand its equipment financing from 10% of the present total.

de Koning stressed that Funding Circle is expanding its expertise in equipment finance and relies for many leads from intermediaries. “We are members of the National Association of Commercial Finance Brokers (NACFB) and join the association in a series of promotional roadshows.”

In October 2013 Funding Circle expanded operations into the US. It joined forces with San Francisco-based business lender Endurance Lending Network – a company with a strong track record in the US.

The expansion was aided by Accel Partners which provided a $37 million series C investment.  A new investor, Ribbit Capital, joined early backers New York-based Union Square Ventures and Index Ventures. In total Funding Circle has now raised $58 million in equity funding.

According to the US Small Business Administration there is a $100 billion funding shortfall in the US economy with small businesses, the lifeblood of the country as in the UK, lacking access to the finance they need to create jobs and accelerate economic growth.

A significant boost
de Koning said that the recent UK Budget provided a significant boost for P2P lenders.

“Firstly,” he explained, “the Chancellor announced that P2P lending will be included within ISAs as part of the government’s wider ISA reform. And secondly, that a new consultation will be launched into the mandatory referral of small businesses to alternative providers from banks, where they cannot lend.”

He added: “Approximately 70% of businesses who borrow through Funding Circle believe they could have got a bank loan but chose us instead.”

James Meekings, co-founder of Funding Circle said: “We are already talking to banks about the possibility of lead referrals for small businesses. We do see ourselves as complementary to banks. A core part of a bank’s business is having a positive banking relationship with their customer so partnering with a non-bank funder where there is no risk of them losing their current account business makes a lot of sense. The main challenge is that most businesses don’t get to the reject stage at the bank so signposting needs to start earlier.”

Working with other lenders

Meekings added: “This news is a huge win for British investors up and down the country, and represents a seminal moment for our industry. The inclusion of P2P lending in ISAs ensures British people earn inflation-beating, tax-free returns whilst helping support the country’s economic recovery.”

In partnership with Zopa and RateSetter, Funding Circle launched P2P Finance Association in 2011, a trade body aimed at ensuring high minimum standards of protection for lenders and borrowers in the industry. In April this year, the Financial Conduct Authority (FCA) introduced formal regulation, something de Koning welcomed.

There is no doubt that Funding Circle has a vastly different culture to traditional lenders – with an enthusiastic and willing “can do” attitude. However, it is a newly-formed lender with an inevitable lack of market and product experience. Meekings belief in the future of Funding Circle’s partnership arrangements with bank lenders – and their asset finance subsidiaries – may well lead to much-needed invigoration in the UK leasing industry and a valuable replacement of worn out assets in small businesses.